Most restructuring professionals will tell you that there is no “typical” restructuring. That is absolutely true. Every financially distressed business is different and the character and direction of its restructuring will be highly dependent upon, among others, its capital structure, its liquidity profile, and the level of support it can build for its reorganization among key stakeholder bodies. Nevertheless, there are some important similarities in the way that any company should initially address a distressed situation. We discuss below a variety of key tasks, or “commandments,” that we recommend any company should undertake as soon as it anticipates possible financial distress.
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Sheppard Mullin
Fed Provides Further Updates to Main Street Lending Program, Expanding Availability in Advance of Program Launch
On June 8, 2020, the Federal Reserve Bank of Boston, the administrator of the Federal Reserve’s Main Street Lending Program, released updated term sheets for the three types of loans, “New,” “Priority” and “Expanded,” that will be available under Main Street as well as an updated extensive Frequently Asked Questions (FAQ) (https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm). The Main Street Lending Program is a $600 billion loan program to provide support to small and medium-sized businesses established, with the approval of the Treasury Secretary, by the Federal Reserve using its emergency authority under Section 13(3) of the Federal Reserve Act, with $75 billion in equity provided by the Treasury Department under the $454 billion appropriation of Section 4003(b)(4) of Title IV of the Cares Act.
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Ninth Circuit Rulings on Equitable Mootness in Transwest and Sunnyslope Impact Third Party Investors
The doctrine of equitable mootness provides that Chapter 11 reorganization plans will be deemed moot, and therefore not subject to appellate review, if a plan has been substantially consummated and granting appellate relief would impair the rights of innocent third parties relying on the confirmation order. Since the development of the court-created mootness doctrine nearly a quarter century ago, courts have grappled with applying it in such a way as to strike an adequate balance between the need for finality, and the need to exercise the court’s jurisdiction and preserve the right to appellate review. The standard interpretation in bankruptcy was that once the debtor took definitive steps to put the Chapter 11 plan in place (i.e., “substantial consummation”), and the objecting creditor neglected to gain a stay of the plan confirmation order pending appeal, then any appeal was presumed to be “equitably moot” and therefore subject to dismissal by the appellate court.
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Supreme Court Holds that Bankruptcy Courts can Adjudicate Stern Claims
In a 6-3 ruling, the U.S. Supreme Court held that bankruptcy courts have the authority to adjudicate Stern claims so long as the litigant parties provide “knowing and voluntary consent.” This decision in Wellness International Network, et. al. v. Richard Sharif provides much needed guidance as to the breadth and applicability of the Supreme Court’s 2011 decision in Stern v. Marshall.
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Continuity of Enterprise is Enough for Successor Parties to be Liable
Successor liability is often a concern for the acquirer when purchasing substantially all of a seller’s assets. While this risk is well known, the circumstances under which an acquirer will be found liable under the theory of successor liability are less clear. The recent decision in Call Center Techs., Inc. v Grand Adventures Tour & Travel Pub. Corp., 2014 U.S. Dist. Lexis 29057, 2014 WL 85934 (D. Conn. 2014), sheds helpful light on this issue by defining the continuity of enterprise theory of successor liability.
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Dodd-Frank’s Intersection with the Bankruptcy Code Could Have Significant Impact for Unsecured Creditors
On February 11th, the three private plaintiff-appellants and eleven State plaintiff-appellants in State National Bank of Big Spring, et al. v. Jacob J. Lew, et al. filed briefs with the U.S. Court of Appeals for the District of Columbia Circuit in their appeal of the District Court’s decision that the plaintiffs lacked standing to challenge certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act” or the “Act”). The plaintiff-appellants challenged the “Orderly Liquidation Authority” granted to the FDIC under Title II of the Dodd-Frank Act on the basis that such authority supplants Chapters 7 and 11 of the Bankruptcy Codeand thereby strips the plaintiff-appellants of the statutory protections, amounting to property rights, afforded by the Bankruptcy Code to unsecured creditors. Judge Huvelle found this argument insufficient to satisfy the standing requirement imposed by Article III of the Constitution, stating that “[while] it is true that Dodd-Frank empowers the FDIC to treat creditors’ claims somewhat differently than they are treated in traditional bankruptcy proceedings…no one can know if this will ever happen.” The plaintiff-appellants argue that the challenged provisions are facially invalid, rendering the probability of harm test irrelevant, because “[f]or creditors of large financial institutions, Title II of the Dodd-Frank Act expressly ends one of the Bankruptcy Code’s core statutory rights: creditors’ express right to be repaid equally with other similarly situated creditors.”
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Attacking LBO Payouts as State Law Fraudulent Transfers
The United States Bankruptcy Court for the Southern District of New York (the “Court”) in Weisfelner v. Fund 1 (In Re Lyondell Chemical Co.), 2014 WL 118036 (Bankr. S.D.N.Y. Jan. 14, 2014) recently held that the safe harbor provision of 11 U.S.C. § 546(e) did not bar unsecured creditors from seeking, under state fraudulent transfer law, to recover payouts made to former shareholders of a company acquired in a leveraged buyout. This case highlights the limitations in section 546(e)’s so-called safe harbor provision, which protects settlement payments made to complete pre-bankruptcy securities contracts from later being attacked and avoided by the bankruptcy estate representative as fraudulent transfers.
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Showdown in the Richmond: The City of Richmond Threatens Eminent Domain on Underwater Loans
BREAKING NEWS: In a contentious 4-3 decision and amid more than 300 community members on both sides of the issue, the City Council for the City of Richmond voted to continue pursuing its eminent domain plan in the early morning hours of Wednesday, September 11. The council also rejected two related measures, one that would withdraw the letters threatening eminent domain and another requiring Mortgage Resolution Partners, the firm providing financial backing for the City’s plan, to obtain insurance to insulate the city from legal liabilities.
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Cherry Picking Contract Provisions in Bankruptcy: Not so Taboo After All?
One of the quintessential principles of the Bankruptcy Code is that when a debtor assumes an executory contract, it must assume the contract as a whole – a debtor cannot cherry pick the contract provisions it wants to assume while rejecting others. Two recent bankruptcy court decisions – In re Hawker Beechcraft, Inc. and In re Contract Research Solutions, Inc. – demonstrate a growing trend among debtors to test the parameters of this general rule. But they also provide guidance to parties on how they can structure their agreements to limit or expand a counterparty’s ability to selectively assume contract provisions in bankruptcy.
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Committee’s Attack upon Lender’s Make-Whole Premium Denied
The United States Bankruptcy Court for the District of Delaware (the “Court”) recently upheld a $23.7 million make-whole payment (the “Make-Whole Payment”) in In re School Specialty (Case No. 13-10125), denying the assertion by the Official Committee of Unsecured Creditors (the “Committee”) that the fee is unenforceable under the United States Bankruptcy Code and applicable state law.
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Saying Goodbye to Fannie and Freddie?
The U.S. Treasury placed Fannie Mae and Freddie Mac into conservatorship in September 2008 as a result of the subprime mortgage crisis. Five years later, the first indications of potential reform are emerging from Capitol Hill. Senators Bob Corker (R-TN) and Mark Warner (D-VA) are currently working on a draft bill entitled, the “Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013,” copies of which began circulating on June 6, 2013. The bill contemplates winding down Fannie Mae and Freddie Mac and replacing them with a new government agency called the Federal Mortgage Insurance Company (the “FMIC”).
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